Someday people who have no need for loans might never have a need for a bank. For example, I might pre-pay for smartphone wireless data or pre-pay for coffee. If I owe you 5 USD perhaps someday I can just send you 5 USD from my Starbucks account to your Starbucks account. Maybe you don't drink coffee but you eat hamburgers and there might be a payment channel from Starbucks accounts to McDonalds accounts. If my employer will pay my Starbucks account and my landlord will accept payments the same way, I might never need a bank account. Perhaps in the future individuals will be able to open a CBDC account at the Federal Reserve, notwithstanding that there is currently no intention to make this possible. If this happens many people would have no need to use a commercial bank.

If these things happen, banks will attract fewer deposits. Perhaps banks will have to issue more bonds. FDIC's chairman, Martin Gruenberg, is suggesting banks should issue more bonds because it will make the institutions more resilient.

At the core of Gruenberg's plan is something very simple — requiring big banks to issue bonds.

Reference... Felix Salmon article on Axios.com

What will happen to the U.S. housing market if banks have more bonds and fewer deposits in their liabilities? In particular what will happen to the selling prices of homes?


2 Answers 2


You are hinting at an answer which I would agree with. Definitely the case that if the deposit model of banking breaks down, various loan products will inevitably get more expensive. Even if you don’t believe in digital currencies, there’s evidence in the last 12 months of the increased velocity of deposits due to technological innovation. This brings into question the traditional deposit driven banking model under which deposits are assumed to be sticky.

Deposits are generally much cheaper than other forms of financing such as bond issuance, so less reliance on deposits will cause bank cost of funding to increase, thus leading to banks charging more for loan products.

Having said that, you ask about housing prices which are chiefly financed through the mortgage bond market in the US. Given that these loans are mainly repackaged and sold to investors rather than retained on bank balance sheets , there may be less impact on this particular asset class than for example the general loan market.

  • $\begingroup$ I agree that generally deposits are a cheap liability. Europe operated a long time with the opposite logic though. Although interest rates were negative, deposits were not allowed to go negative in many legislations. Yet, impacts on rate adds on top of reference rates were marginal. Granted, there were cheap ways to finance like TLTROs but overall it will mainly squeeze bank profits as opposed to making loans a lot more expensive (at least in the way European banks operate, I am not experienced with the US banking system). $\endgroup$
    – AKdemy
    Aug 20, 2023 at 12:58
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    $\begingroup$ I agree that when rates are zero or negative , deposits are not as relatively cheap as when rates are significantly positive. $\endgroup$
    – dm63
    Aug 21, 2023 at 3:51

Your example has nothing to do with Gruenberg's suggestion. If you have short term liabilities (deposits) but long term assets (loans) you expose yourself to a lot of risk (that also needs to be modelled and taken into consideration, e.g. for interest rate in the banking book - IRRBB - calculations). By issuing long term (fixed rate) bonds, an institution can reduce IRRBB.

You mainly fantasize about getting paid in weird Starbucks accounts and the like. The whole reasons money and banks originated is to not have to find people who want a burger in exchange for a coffee. There will always be a need for bank deposits (convenient, secure, easy to withdraw and get paid, earn some interest,...), even if it may be outside traditional banking. If so, loans may also move outside of traditional banking. However, all the regulation exists for a simple reason, to keep everyone's money safe. If it were to move elsewhere, regulation will kick in and make it like a bank account again (or illegal to use).

With regards to housing, as long as there is demand for housing, and people need loans, there will be someone providing them. There should also be little to no impact on the way loans are structured because they are currently priced with regards to interest rates (reference rates) plus markup, not depending on deposits.

  • $\begingroup$ You said there will always be a need for deposits. Where did I suggest the contrary? You said the reason banks originated is to not have to find people who want a burger in exchange for a coffee. I disagree that banks originated because of the need to avoid bartering. It was money that originated because of the need to avoid bartering. $\endgroup$
    – H2ONaCl
    Aug 20, 2023 at 12:30
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    $\begingroup$ "Someday people who have no need for loans might never have a need for a bank." and "I might never need a bank account" means there will be no deposits. $\endgroup$
    – AKdemy
    Aug 20, 2023 at 12:42
  • $\begingroup$ A CBDC account would contain deposits. A prepaid coffee account is like a deposit account and if I can send value and reclaim value, it certainly is. $\endgroup$
    – H2ONaCl
    Aug 21, 2023 at 4:42

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